Tesla: Why It Is Rising to Success

How is the Market Changing?

The car manufacturing industry is undoubtedly affected by the price of oil. Indeed, gasoline is a complementary good to cars and, as such, OPEC’s September, 2016’s deal to cut output levels of oil is an alarming development. Goldman Sachs has already announced that the oil reduction is expected to “add $7 to $10 to oil prices in the first half of [2017]” alone (GulfNews, 2016). However, it is important to note that the cost of batteries have simultaneously/continuously decreased, which has had a dramatic effect on the costs of electric vehicles.

Indeed, as the graph above demonstrates (Graph by Ramez Naam, 2016), the price of an electric car is expected to drop below that of the lowest-priced gasoline-powered car within the next two decades. Tesla Motors has itself announced that as it has “gradually ramped production of [its] Model S, manufacturing costs per vehicle have decreased” (Annual Report, 16). Tesla’s use of an electric powertrain has meant more energy efficiency and a lower fueling cost compared to internal combustion vehicles. Moreover, due to government incentives, fewer moving parts and the lack of traditional components, the maintenance and ownership costs for Tesla’s electric cars are less than all others (A. R., 4).

In fact, Tesla has been a continuous source of innovation in not only the design and efficiency of its vehicles, but also as a pioneer in autopilot technology. Tesla’s Autopilot feature “includes machine steering, collision avoidance, assisted lane changing and adaptive cruise control” based on its camera and radar technologies. Moreover, whenever improvements are made, Tesla vehicles are updated by a simple “software upgrade that won’t require owners to bring their cars into a shop” (Andrew Khouri, 2016), providing a continual and growing customer service. Car companies the likes of Ford, General Motors, BMW... are all vying for the increasing market share consumed by electric vehicles. Thus, not only is Tesla the tip of the spear driving electric progress forward, they are also the benchmark for success in the United States and are ever-expanding into European and Asian markets.

Big Ambitions

Having begun in 2003, Tesla’s mission has been to “design, develop, manufacture and sell high-performance fully electric vehicles and energy storage products,” as well as to establish “[its] own network of vehicle sales and service centers and Supercharger stations globally to accelerate the widespread adoption of electric vehicles” (A. R., 4). Tesla is very much on target to meeting these goals, and this is evident in its short history of actions and financial transactions. Indeed, its Gigafactory--“expected to attain full production capacity in 2020, which is anticipated to be sufficient for the production of approximately 500,000 vehicles annually” (A. R., 9)--is the centerpiece of Tesla’s long-term sustainability plan. According to Tesla, “the Gigafactory will [...] produce more lithium ion batteries annually than were produced worldwide in 2013” (Tesla.com, 2016).

Tesla effectively wants to build its own global network of selling centers, service centers, and Supercharger stations and to move the world onto a pathway of sustainable transportation methods.

According to emissions laws passed in many US states, car manufacturing firms have to have a certain percentage of their vehicle production meet zero-emission standards. As Tesla only sells zero-emissions vehicles, they have a major surplus of the (ZEV) credits, as well as Environmental Protection Agency’s (EPA) national greenhouse gas (GHG) credits and National Highway Traffic Safety Administration’s (NHTSA) Corporate Average Fuel Economy (CAFE) credits, that are issued for going beyond these minimum requirements. Tesla is allowed to sell these surpluses to other car manufacturers at a (peripheral activity) profit (A. R., 10). Tesla has also promised not to sue over patent infringements “to encourage the advancement of a common, rapidly-evolving platform for electric vehicles, thereby benefiting [itself and the world]” (A. R., 12).

Since its 2003 founding in Silicon Valley, it has continued to set the benchmarks for electric vehicles. First, it released its high-performance Roadster in 2008, then the world’s first premium electric sedan in the Model S in 2012, and then the Model X in 2015. The picture below (Sparks, 2016) shows just how many awards the Model S itself has won from vehicle, media, and technology critics.

In 2017, the next generation Model 3 will be available for purchase, and there has already been hundreds of thousands of reservations placed for it--and Tesla itself advertises very little.

Indeed, the Model 3 is the low-cost alternative Tesla has been planning for since the beginning, having conducted massive efforts to lower the cost of batteries. And Tesla is very much behind this price reduction through its Gigafactory in partnership with Panasonic. In effect, Tesla is working in every sector of its industry.

Indeed, allowing competitors to make use of its patents is a brilliant strategy to make competitors implicitly add to the number of charging stations across the world, and to effectively diminish reliance on gas stations. Tesla sets the bar for exploiting its competitors. And although there are big car companies that compete with a few electric vehicles (such as Ford and General Motors), there are none as focused on energy innovation and progress, on the environment and technology, and on the electric car itself as is Tesla Motors.

Future Profitability?

Turning to its finances, we witness Tesla’s astonishing rise in value. Since its IPO, its stock has gone from its opening price of $17 in June, 2010, to September, 2016’s closing price of around $200. That is a tenfold increase in stock price and gives an “aggregate market value of voting stock held by non-affiliates [... of] $26,340,519,416” as of June 30th, 2015 (A. R., 1, 30). Although Tesla does “not anticipate paying any cash dividends in the foreseeable future” (A. R., 29), it is very heavily investing in its capacity to meet consumer demand for its vehicles and to build a sustainable model to supply the batteries needed for electric vehicle production.

The graph below (A. R., 30) shows just how much returns investors will have made on a $100 investment over the last five years. And given Tesla's recent third quarter earnings report, this is likely to soar further--making Tesla Motors a very interesting investment indeed.